Nonprofit mergers flat, face hurdles

Despite financial pressures from cuts in government funding and private giving, the overall rate of mergers among nonprofits was mainly unchanged in the five years through 2012, a new study says.

Mergers did grow significantly among nonprofits in the field of child and family services, and the main type of merger involved big nonprofits absorbing smaller organizations, says the study by The Bridgespan Group.

Promising nonprofit mergers often trip over three volatile issues, including getting the organizations’ boards in sync, find roles for their senior staff, and combining their brands, says Why Nonprofit Mergers Continue to Lag, which was published in the Stanford Social Innovation Review.

Yet while “creating a successful merger remains difficult, even for organizations that have done it before,” the study says, the nonprofit sector is “taking mergers more seriously than before.”

Funder support

Funders are improving their support for mergers, it says, and more nonprofit executive teams considering mergers “as a regular step in strategic planning.”

The study compared legal merger filings in Arizona, Florida, Massachusetts and North Carolina from 1996 to 2006 to those from 2007 to 2012.

It found little change in merger rates.

The number of merger filings grew in Arizona, Massachusetts and North Carolina.

But cumulative merger rates in those states — the number of filings divided by the number of nonprofits — remained unchanged from 2007 to 2012 compared to the previous five years because the rate at which new nonprofits were formed kept pace with the increase in merger activity.

Florida was the only state that saw a decline in the number of legal mergers, and a big decline — 30 percent –in the cumulative merger rate, mainly because 15,000 new nonprofits were established in the state.

An analysis of merger activity in Massachusetts found that legal mergers “continue to be most pervasive and increased significantly” among nonprofits in the child and family services field.

It also found the “emergence of a dominant type of merger — large nonprofits rolling up smaller nonprofits,” with the number of large and small nonprofits doubling from 2007 to 2012, and mergers between larger and medium-sized nonprofits growing 1.5 times.

The study included interviews with veterans of nonprofit mergers, as well as their funders and intermediaries.

Merger ‘traps’

It found three “traps” that can surface after merger talks begin and that can “sink discussions between otherwise mission-aligned partners.”

Despite “some progress in developing a favorable funder ecosystem, tools and proactive merger strategy,” it says, “nonprofits need to do a better job navigating the three softer traps if they are going to turn their increased skill to merger into a will to merge.”

In a report five years ago, Nonprofit M&A: More than a Tool for Tough Times, Bridgespan says, it found that mergers “hold far more potential to create value in the nonprofit sector than most people realize.”

But at least four “barriers were preventing that potential from being achieved,” it says.

Those included a lack of knowledge about “when and how to think” about mergers and acquisitions; a lack of funding for due diligence and post-merger integration; a lack of “matchmakers to create an efficient ‘organizational marketplace’ through which nonprofits could explore potential merger options; and a “tendency to look at mergers reactively, as a route out of financial distress or leadership vacuums instead of proactively as an effective growth strategy.”

Merger funding

While still relatively small, the new study says, new sources of funding are flowing for merger due diligence and integration.

That funding includes philanthropic funds established in Boston, New York, Los Angeles, Charlotte and other cities that make grants to cover merger costs or provide technical assistance for potential mergers or other collaborations.

According to Foundation Center data, the study says, grants for mergers on average have grown about 18 percent a year in real terms to $5.3 million in 2011, up from $1.4 million in 2003.

“The total amount of money dedicated to supporting mergers remains small, but it is growing,” the study says. And foundations increasingly embrace matchmaking, organizing ‘meet and greets’ among grantees so they can get to know each other and explore synergies.”

Strategic mergers

The study says it also sees evidence that more nonprofits are “taking a strategic and forward-looking view toward mergers.”

From November 2008 to November 2010, Bridgespan conducted four surveys with a pool of 800 nonprofit executives, generating 100 or more responses in each survey.

Consistently, it says, 20 percent of all organizations reported considering mergers as part of their strategy and, by November 2010, seven percent had completed acquisitions.

Those acquisitions involved nonprofits with revenues under $5 million or over $25 million, numbers that Bridgespan says tracks somewhat with Massachusetts data from its study covering 2007 to 2012 that show the biggest increases over the previous five years involve nonprofits with revenue over $10 million or under $3 million.

Merger barriers

If the nonprofit sector is making progress to overcome the four barriers its study identified four years ago, Bridgespan says, a key reason the rate of mergers may not be increasing is that “deals that might have been strategically and financially advantageous turned sour during negotiations over the highly emotional issues of boards, senior staff, and brand.”

A successful merger can help expand a nonprofit’s programs, capabilities, reach and revenue, and can improve the organization’s costs structure, “benefiting the people and communities it serves,” the study says.

So it is “vital that funders continue to invest in supporting mergers and learn to navigate all the obstacles along the way — including the softer traps,” it says.

To help do that, it says, funders should be “capturing, codifying and sharing know-how on all forms of alliances, connecting donors that could become more than the sum of their parts, and providing financial support for the due diligence and integration costs that must accompany a merger.”

Funders also should be “serving as trusted advisers and thought partners” to confront hurdles to mergers, it says, and should be “careful to strengthen an ecosystem that enables collaboration that can lead to mergers, rather than forcing deals.”

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The experience of many funders is that nonprofits are reluctant to merge( or even consider merging) even with funder financial support. The reasons are many- loss of control; perceived job loss; different cultural identities;”founderitis”. The larger question is what incentives do nonprofits have to merge or consolidate if they can survive on their own?